Question

Discuss the advantages and disadvantages of creating various budgets. Do you see any ethical issues that may arise in the preparation of the budgets?

Topics: Capital Budgeting Decisions, Master Budgeting, and Flexible Budgets and Performance Analysis according to Managerial Accounting for Managers by Noreen, Brewers, and Garrison 2020

Answer 1

Following are the Advantages of creating various budgets :-

1. It helps the managers built and see from a Long term perspective. Identify the problems now and plan accordingly.
2. It helps the managers in deciding which assets are worth investing in due to limited availability of cash.
3. It helps in detecting, analyzing risks that might affect the company.
4. It helps in making informed decisions after taking into account all the possibilities.
5. A control is kept over the expenditures of the company.
6. It reflects the true financial position of the company i.e how much is the company earning or is their over expenditure that needs to be controlled.
7. Managers will be more motivated and committed to do well as they are the one who helped or made the budget.

Following are the Disadvantages of creating various budgets :-

1. Due to being long term in nature, it might be difficult to reverse or change them if needed.
2. Future is not certain , so its a big risk that the assumptions the budget is based on might not be correct.
3. In case of large firms, it might be difficult to locate the expenses of different departments on individual basis.
4. It is a time consuming process.
5. Managers may divert from the strategic goal of the company.
6. The budget may not be in line with the overall organisational goal.
7. It might become difficult to understand by all the employees of the company due to its complexity.

Yes, there might arise some ethical issues while preparation of budget like Greed or selfishness to earn more and more even by using wrongful methods be it legally or morally , conflict in the interests of the organization with that of its employees i.e. the employees may use methods to gain more which may not be in the interests of the company or may manipulate the budgets in a way that is in the interest of managers rather than organization as a whole. De-motivation of employees if budget is imposed on them or there are unrealistic targets to be achieved. It may lead to rivalry among departments to get more amount allocated to their department.